Another Rent vs. Sell Scenario: One Marshmallow now? Or Many Marshmallows later?

[George M.]

Hi BP,

New to the forums here, tho I've listened to a couple podcasts and am anxious to get started. My wife and I currently live in a SFH that we bought in 2010 and are planning to move out soon to a different property. Question is whether to sell it now (and realize a good amount of appreciation in the gain) or to hold it and lease it out (and hopefully cash flow a little bit). Here are the specifics:

Financials

Originally bought our current home in 2010 for $290k and we currently owe about $240 on it.  Since then, we've been lucky to have a modest amount of appreciation and our realtor believe we can sell for about $340k.  To me, that sounds like we gross ~$100k and net maybe $70k when all is said and done.

If we lease it out instead, we would finance the house to a 30 year conventional to get the mortgage payments down to ~$1250/mo (of course, we'd have to chip in ~$4k to close the refi, but we have the budget for that at the moment). Factor in tax, insurance, HOA fees, and a small maintenance budget and our operating expenses come to ~$925/mo. Then, based on market analysis that we've done with our realtor, we think we can rent out the property for $2400/mo, so we'd hope to see about cash flow of $200/mo from the start. (They always say you need to make money when going in, right?) The question here is whether that $200/mo is enough to justify leasing it out.

Market

Our current home (SFH) is in what I'd term a "desirable" suburban neighborhood. There's a top-rated elementary school within walking distance, with the junior high and high school also rated as excellent as well. As you can imagine, though, this makes most of the neighborhood is owner occupied, though there are a few rental properties sprinkled throughout (as of this writing, there are 4 other properties that are up for lease). The concern here is that it would be easier to sell rather than to rent.

The SFH is a 3/2, 1.5 story (flex space upstairs that could be used as an additional 4th bedroom?). In my mind, that would be ideal for a renter, but I guess that's just an opinion.

Personal Goals

As a first step into real estate investing, we are hoping to find a property that cash flows from the start to add in additional monthly income.  We aren't afraid to self-manage the property to start and the we would be living less than 15 minutes away, so dropping by to help out tenants wouldn't be a problem.  We currently have a good amount of equity in the property today, and the thought is that we would leverage this later into a 2nd investment property - but part of me is wondering whether it would be better to cash out of this one now (realizing the appreciation) and use those funds to finance a different property that might have better cash flow.

Any and all advice is welcome - thanks in advance!

-george

[Jean Bolger]

Also, beware the tax ramifications. If you sell as owner occupants you keep all the gain tax free. After a certain amount time renting it out, that option goes away- it is now an investment property and you owe capital gains tax on the sale. (I always forget the details on this for some reason, but it's something like you have to have lived in the house for 2 of the last 5 years to get the tax exemption)